China, the world's biggest holder of foreign exchange reserves, renewed its commitment to the U.S. Treasury market on Tuesday but said it would be wary of substantially boosting its gold holdings, reports Reuters.
This means one of two things:
1. China realizes that if it wants to dump Treasury securities at a reasonable price and buy gold at a reasonable price, it better say the opposite so that the market doesn't front run them.
2. The Chinese continue to believe mercantilism is a respected economic theory, where the capture of money over product is the goal of international trade. This view will result in the Chinese continuing to increase the size of their currency, as they prop up the dollar and buy U.S. debt that no one else wants. It will ultimately lead to huge Chinese inflation.
Possibility 1 would be a wise strategy on the part of the Chinese. I fear, however, that it is strategy 2 that the Chinese are adopting, which will, in the long-term, result in a price-inflation led destabilisation of the country
If they increase the size of their currency, won't they also have to increase the size of their wallets and bank vaults? Think of all the retrofitting they'll have to do to widen the slots on their vending machines too.
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